Are You Ready For The Blockchain?

Last week we explored the origins of Bitcoin and other cryptocurrencies and touched upon the potential of this technology to transform financial services.  This week we delve into the real-world application of Bitcoin – and its underlying technology, Blockchain – in contemporary financial services.

Blythe Masters – former head of global commodities at J.P. Morgan and widely credited as the inventor of the Credit Default Swap – said that we “should take Blockchain as seriously as the concept of the Internet in the early 1990s.”

We agree. Here’s why.

* * * * *


No other technology better encapsulates the intersection of technology and finance. And yet it is the technology underpinning Bitcoin that holds the potential to transform global financial services and trade.

Of course, cryptocurrencies are just one implementation of blockchain, which has wider applications throughout the global financial ecosystem and across the real economy, too. Possible uses of the technology include payments infrastructure, followed by fund transfer infrastructure and digital identity management, but this is just scratching the surface of what’s possible.

Distributed Leger Technology (DLT) has been called the most significant innovation in the finance since the advent of double-entry bookkeeping centuries ago. It poses an existential challenge to financial industry incumbents, with the rise of scalable, globalised disintermediation. McKinsey is on record as saying that banks and exchanges may not exist within 10 to 20 years, with increasing volumes of payments and exchange taking place on a peer-to-peer basis.

A wave of hype has accompanied blockchain’s arrival on the scene. Gartner places the technology at the “peak of inflated expectations” of its hype cycle curve, and the consensus seems to be that it could possibly take decades for this technology to realise its potential.

The world of blockchain and cryptocurrencies is populated by an eclectic cast of highly innovative start-ups building exciting new products, slow-moving incumbents making incremental improvements to existing technologies and self-interested thought leaders, all jostling for position in a 21st Century Gold Rush.

There’s a reason everyone’s talking about blockchain. It has the potential to transform not just peripheral processes, but entire industries. It’s a new way of thinking about – and executing – transactions and data transfer. No wonder financial institutions are rushing to develop their own capabilities in DLT.

Such comprehensive restructuring seems a daunting challenge. In the face of such innovation, large-scale financial institutions and other incumbents have been forced to adapt. According to PwC, funding in blockchain companies increased 79% year-over-year in 2016 to $450 million. Over the past 3 years more than $1.4 billion has been invested in blockchain to explore and implement uses in the financial services industry. This will only increase as decision makers become more comfortable with the technology

There is now a widespread belief that banks and financial institutions can achieve material cost benefits by reducing friction with blockchain technology and grow revenue with better access to data, greater liquidity, real-time reporting and new client solutions. Bain & Company say 80% of financial market participants believe DLT will be transformative and expect their firms to adopt it by 2020.

Securities market participants are leading the charge, with a focus on discrete applications within the equity, debt and derivative markets. Banks are exploring issuance and trading of bonds on distributed ledger networks, such that the terms of the bond embedded as code on the digital asset enabling automated calculation and payment of coupons and redemption.

But enough talk of investigation and exploration. What are the practical implications and applications for banks and financial institutions in 2017?

The news that a large European bank has completed instantaneous payments between two clients on a cross-border basis using blockchain technology is a portent of things to come. There’s a lot of focus on private blockchains, including the Enterprise Ethereum Alliance, which connects Fortune 500 enterprises, start-ups, academics, and technology vendors with Ethereum experts and counts J.P. Morgan, Santander and UBS as members. The Depository Trust & Clearing Corporation plans to go live in the first quarter of 2018 with its blockchain-driven platform for CDS reporting. And Daimler and LBBW recently used blockchain technology to execute a bond transaction, launching a €100 million 1 year corporate Schuldschein that was executed digitally throughout, including origination, distribution, allocation and execution.

Our financial system is complex and vulnerable. Banks serve as the guardians of finance and the global banking system has been built on centralized trust, where financial institutions intermediate between counterparties. Blockchain technology could remove complexity and reduce risk through decentralization. But it demands a reconfiguration – indeed, a reformation – of the banking system.

The journey to mass adoption of blockchain is likely to be long and the outcome remains unclear, but there is now an industry-wide consensus that this is a foundational technology that will change the way we do business. Banks and their counterparties, companies, central banks and regulators are rushing to adopt blockchain technology, in order to profit from its relentless march forward. The race is on.

* * * * *

This article was created in association with Origin Markets, directly connecting dealers and issuers in the primary marketplace for the first time. 

Edward Playfair